Thursday's analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.

Canaccord Genuity analyst Gabriel Dechaine re-visited his stock selection criteria for the major Canadian banks and reached the conclusion that he likes Bank of Montreal better than Royal Bank of Canada.

He upgraded BMO to "buy" from "hold" and hiked his price target to $89 (Canadian) from $85. For RBC, he lowered his rating to "hold" from "buy" while maintaining an $85 (Canadian) price target

"For stock selection, we continue to emphasize: (1) relative Canadian Personal & Commercial (P&C) financial performance; (2) 'valuation weighted' diversification; (3) excess capital generation & deployment potential; and (4) relative valuation," Mr. Dechaine commented in a research note.

RBC, he said, no longer screens well using that stock selection criteria, especially when it comes to momentum in its Canadian P&C operations. But BMO is attractive on a variety of measures, especially capital deployment and Canadian P&C momentum.

"When we launched on the sector on April 30, 2014, RY met three out of our four investment criteria. Since then: (1) the bank has regained its historical 5 per cent valuation premium (i.e. it traded in line previously); (2) has returned less capital to shareholders than expected (especially via buybacks) which we believe is due to a more uncertain regulatory capital environment; and (3) has exhibited decelerating momentum in Canadian P&C banking over the past two quarters, including a sector-low 3 per cent growth during Q3/14. As a result, we believe a hold rating is more appropriate for RY. We do believe, though, that for investors seeking exposure to Capital Markets growth that RY is relatively attractive due to the geographic diversification of its wholesale operations," Mr. Dechaine wrote.

He sees things differently for BMO. "The most obvious 'check' for BMO is its relative performance in Canadian P&C banking. BMO has delivered 10 per cent average year-over-year earnings growth in this business over the past four quarters, which is above average. Moreover, we believe BMO's Canadian P&C segment momentum can be maintained on a relative basis, largely through relatively strong loan growth momentum, NIM (net interest margin) stability and, importantly, diligent expense management. We believe the latter element is a lever the bank can pull, with year-to-date 2014 expense growth of about 4 per cent roughly doubling the expense growth rate it delivered in 2013 in this segment. In our view, BMO is both able and willing (which is just as important, we'd argue) to reduce expense inflation if revenue generation becomes more challenging. On capital, though the bank's CET 1 ratio of 9.6 per cent at Q3/14 is not relatively high, we believe the bank has proven itself adept at balancing opportunistic M&A (i.e., attractive valuations) and share repurchases when its CET 1 ratio is within its target range of 9.5 per cent-10.0 per cent. Finally, though BMO's relative valuation isn't especially compelling, we believe an in-line multiple could turn into a premium, especially if the bank builds on momentum in its U.S. retail bank."

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BMO Nesbitt Burns analyst Heather Kirk upgraded RioCan Real Estate Investment Trust to "outperform," believing investors have the opportunity to load up on the REIT while it has been underperforming the sector. She maintained a price target of $30 (Canadian).

RioCan's unit price has fallen more than 8 per cent since May, while the S&P/TSX REIT index fell less than 4 per cent over the same period, Ms. Kirk noted. The REIT is now trading modestly below net asset value, which is well under its historical average net asset value premium of about 8 per cent.

"We view the recent sell-off as an opportunity to acquire units at just below net asset value," Ms. Kirk said in a note. "The REIT's current trading price provides no value for the REIT's extensive North American operating platform."

"The REIT is increasingly focused on core markets, its urban development strategy and unlocking value within the existing portfolio. We believe the REIT's focus on core urban markets combined with a sizable development pipeline will enhance the REIT's growth profile. ... The REIT has ample balance sheet flexibility/capital access to pursue its growth initiatives and continues to focus on improving credit metrics," she added.

The analyst consensus price target for RioCan over the next year is $29.86, according to Thomson Reuters data.

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Investors are clearly disappointed by Glenn Murphy's decision to retire after his seven-year stint as CEO of Gap Inc., says Canaccord Genuity analyst Laura Champine. Shares were down more than 11 per cent in late morning trading on the New York Stock Exchange, a day after the company disclosed he was leaving and also reported disappointing September same-store sales at its Gap-branded stores.

Ms. Champine noted that Mr. Murphy was a steady hand during rough spots such as the recent recession and a nasty spike in cotton prices.

But she sees bright spots for the company as it transitions to new leadership.

"We are not surprised by the selection of Art Peck to succeed Murphy effective February 1, 2015 given his experience spearheading the company's digital initiatives and his right-hand man relationship with Murphy," she says. "In addition to building a stronger e-commerce presence, we believe GPS's online initiatives such as reserve in store will become traffic and sales drivers across all channels."

Ms. Champine maintained her "buy" rating and reduced her price target to $49 (U.S.) from $50.

Some other analysts weren't as upbeat. At least three of them downgraded their ratings on The Gap to the equivalent of hold ratings, including Ike Boruchow of Sterne Agee, who now has a price target of $40 (U.S.). "While Art Peck has enjoyed success in the various roles he has undertaken at (Gap), replacing Glenn Murphy will be no small feat," Mr. Boruchow said.

The average analyst price target is $43.94, according to the latest Bloomberg data.

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CIBC World Markets analyst Robin Manson-Hing is drastically cutting his price target for Avigilon Corp. as sales force growth ends and focus turns to the bottom line.

Avigilon will report third-quarter results the first week of November. "Over the last three months, splitting of sales manager coverage regions has slowed to a near halt, while product and channel strategies will focus increasingly on EBITDA margin growth at the expense of revenue," said Mr. Manson-Hing. "As expectations for Avigilon's sales growth come down, we believe the P/E multiple should be closer to that of its peers. We also believe consensus 2015E EBITDA and EPS need to move towards our estimates."

Mr. Manson-Hing maintains his "sector outperformer" rating and slashed his price target to $25 (Canadian) from $40. The analyst consensus price target is $31.75, according to Thomson Reuters.

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In other analyst actions:

Dundee Securities upgraded Cameco to "buy" from "neutral" with a price target of $23.50 (Canadian).

Desjardins Securities upgraded Agnico Eagle Mines to "buy" from "hold" with a price target of $42 (Canadian).

Canaccord Genuity upgraded Bear Creek Mining to "speculative buy" from "hold" with a price target of $2 (Canadian).

Canaccord Genuity downgraded Midway Gold to "hold" from "speculative buy" with a price target of $1.20 (Canadian).

Raymond James upgraded Ensign Energy Services to "outperform" from "market perform" with a price target of $18.50 (Canadian).

Desjardins Securities upgraded New Gold to "buy" from "hold" with a price target of $7 (Canadian).

Raymond James upgraded Precision Drilling to "strong buy" from "outperform" with a price target of $16 (Canadian).

Jennings Capital initiated coverage on Petrowest with a "buy" rating and $1.50 (Canadian) price target.

TD Securities initiated coverage on Genworth MI Canada with a "buy" rating and $45 (Canadian) price target.

CIBC World Markets raised its price target on Jean Coutu Group to $26 (Canadian) from $23 and reiterated a "sector performer" rating.

Oppenheimer upgraded Apple to "outperform" from "perform" with a price target of $115 (U.S.).

BMO Nesbitt Burns downgraded Colgate Palmolive to "market perform" from "outperform" and cut its price target to $70 (U.S.) from $75.

BMO Nesbitt Burns initiated coverage on Microsoft with a "market perform" rating and $48 (U.S.) price target.

With files from Bloomberg